Bonus Depreciation in 2026: What Real Estate Investors Need to Know

For a rental you put under contract and buy in 2026, bonus depreciation is 100%. The July 2025 tax law (the One Big Beautiful Bill Act) made 100% bonus depreciation permanent for qualified property acquired after January 19, 2025. It applies to the short-life parts of a rental, such as appliances, flooring and site improvements, and not to the building structure or the land.

The catch is the word "acquired". The percentage depends on when you acquired the property, not only on when you placed it in service, and a signed contract can set that date earlier than you expect.

What bonus depreciation does

Normally you recover the cost of a rental slowly. The structure of a residential rental is depreciated over 27.5 years on a straight line, a nonresidential building over 39 years, and land is not depreciable at all.

Bonus depreciation is a first-year deduction for property with a tax life of 20 years or less. At 100%, you deduct the entire cost of that property in the year you place it in service, which means the year it is ready and available to rent. It does not create new deductions. It moves deductions you would have taken over 5, 7 or 15 years into year one.

Two features matter for landlords. Used property qualifies, as long as you have not owned or used it before and you did not buy it from a related party, so the components of an existing rental you purchase are eligible. And bonus applies automatically unless you elect out of it.

The percentage depends on when you acquired the property

The earlier law phased bonus depreciation down by 20 points a year starting in 2023. The 2025 law restored 100%, but only for property acquired after January 19, 2025. Property acquired on or before that date stays on the old phase-down schedule.

Saying "2025 and later is 100%" is a common shorthand, and it is wrong for one group of buyers: anyone who acquired property on or before January 19, 2025 and placed it in service afterward. If that property went into service in 2025, the bonus is 40%. The last row is rare, but it follows from the old schedule: property acquired under the old rules and first placed in service in 2026 would get 20%.

A binding written contract sets the acquisition date

For this rule, property you buy under a written binding contract is treated as acquired on the date you entered into that contract, not the date you closed.

Example of the rule: you signed a binding purchase contract for a duplex on January 10, 2025 and closed on February 28, 2025. The duplex was acquired on January 10, which is on or before January 19. The components of that building get 40% bonus, not 100%, even though closing and placed in service both happened after the cutoff.

If you had signed the contract on January 25, 2025, the same duplex would get 100%.

Whether a contract was "binding" on a given date can depend on its contingencies and on state law. If your contract date is anywhere near the cutoff, have your CPA look at the actual document. For property you build yourself, different rules based on when construction begins determine the acquisition date, so get advice on those as well.

Later improvements stand on their own

Each asset has its own acquisition date. If you bought a rental in 2023 and replace the appliances and flooring in 2026, those new items are acquired in 2026 and get 100% bonus. The original building stays on whatever rules applied when you bought it.

What qualifies on a rental property

Bonus depreciation covers property with a recovery period of 20 years or less. On a rental, that means:

When you buy a rental, your purchase price is normally split only between land and building. A cost segregation study is what breaks the building into these categories, and the 5, 7 and 15 year property it identifies is what bonus depreciation applies to. As a rule of thumb, studies on residential rentals often move something like 15% to 30% of the building cost into short-life categories, but it varies a lot by property. Our cost segregation guide explains how a study works and when it is worth the fee, and the cost segregation calculator gives you an estimate.

Two points to raise with your CPA. Qualified improvement property, a 15-year category for interior improvements, applies only to nonresidential buildings and not to residential rentals. And some short-term rentals are classified as nonresidential property with a 39-year life because guests stay on a transient basis, which changes both the baseline depreciation and what qualifies.

Worked example: a rental bought in 2026

This is an example with round numbers. It ignores the mid-month convention, which would trim the structure's first-year depreciation depending on the month you place the property in service.

You sign a contract in March 2026 and close in May on a $500,000 rental. The land is worth $87,500, so the building is $412,500. A cost segregation study reclassifies $82,500 of the building, which is 20%, into 5 and 15 year property. The remaining structure is $330,000.

Without a study:

• Annual depreciation: $412,500 divided by 27.5 = $15,000

With a study and 100% bonus:

• Bonus depreciation on components: $82,500 times 100% = $82,500
• Structure depreciation: $330,000 divided by 27.5 = $12,000
• First-year total: $82,500 plus $12,000 = $94,500

The study adds $79,500 to your first-year deduction ($94,500 minus $15,000). If you can use the whole deduction at a 32% marginal rate, that is $25,440 of federal tax saved in year one ($79,500 times 32%). In later years your deduction is $12,000 instead of $15,000, because the components are already fully written off.

The same purchase at 40%: suppose the binding contract had been signed on January 10, 2025, with the property placed in service later in 2025. Bonus would be $82,500 times 40% = $33,000. The other $49,500 would be depreciated over its regular 5 and 15 year schedules. That is still faster than 27.5 years, but much less of it lands in year one.

The bonus depreciation calculator runs the first-year figure for a given amount of qualifying basis, placed in service year and marginal rate. It keys off the placed in service year, so if you acquired on or before January 19, 2025 you have to apply the 40% or 20% rate yourself.

Can you actually use the deduction?

A $94,500 deduction against a property that nets $10,000 before depreciation produces an $84,500 tax loss ($94,500 minus $10,000). Whether that loss reduces your tax this year depends on the passive activity rules.

For most landlords, rental losses are passive. They can offset other passive income without limit. Against wages and other nonpassive income, there is a special allowance of up to $25,000 a year if you actively participate in the rental, and it phases out between $100,000 and $150,000 of modified adjusted gross income. Above $150,000 the allowance is zero.

Example: with modified AGI of $180,000 and no other passive income, none of the $84,500 loss is usable this year. It is not lost. It is suspended, carries forward, offsets future rental income, and in general is released when you sell the property in a fully taxable sale.

The two common ways around the limits are real estate professional status and the short-term rental exception, which applies when the average guest stay is 7 days or less and you materially participate. Both have detailed requirements. Our rental property tax deductions guide goes through them.

If you cannot use the loss now, the case for paying for a study in the purchase year is weaker. You can still do a study in a later year and claim the missed depreciation as a catch-up deduction with a change in accounting method (Form 3115), so waiting is a legitimate choice.

The trade-off at sale

Every dollar of depreciation lowers your basis and increases your gain when you sell. And the property you take bonus on is taxed more heavily at sale than the structure is.

• Depreciation on the structure comes back as unrecaptured Section 1250 gain, taxed at a maximum of 25%.
• Depreciation on the 5 and 7 year components is Section 1245 recapture, taxed at ordinary rates with no 25% cap. When bonus is claimed on 15-year land improvements, the amount above straight line is generally taxed at ordinary rates as well.

So a $82,500 bonus deduction taken at a 32% rate can be recaptured at up to 32% on a later sale, limited to the gain actually allocated to those components. Our depreciation recapture post follows a $500,000 property like this one through a sale 10 years later, with and without the study.

Bonus depreciation pays off best when you hold for a long time, since you keep the tax savings invested for years, or when you sell through a 1031 exchange, which defers the recapture along with the capital gain. You can test a future sale in the 1031 exchange calculator. An exchange needs a qualified intermediary lined up before the sale closes.

Electing out, and state taxes

You can elect out of bonus depreciation for any class of property in a given year. The election covers the entire class, for example all 5-year property placed in service that year. People elect out when the deduction would be wasted in a low income year, or when they want steadier deductions in future years.

State income tax is separate. Many states do not follow the federal bonus depreciation rules, and California is one of them. In those states you add back the bonus on your state return and depreciate the property on a slower schedule, so you end up with two sets of depreciation records. Rules vary by state, so check yours before you count on state tax savings.

For the federal details, IRS Publication 946 covers depreciation methods, recovery periods and the special depreciation allowance.

Common mistakes

• Using the placed in service date alone. For anything near the January 19, 2025 cutoff, the contract date decides between 40% and 100%.
• Expecting bonus on the whole building. Without a cost segregation study, a rental is just land plus 27.5-year structure, and neither qualifies.
• Ignoring the passive loss rules. A large paper loss that gets suspended does not lower this year's tax.
• Forgetting recapture. The components are recaptured at ordinary rates in a taxable sale. Plan the exit when you plan the deduction.
• Assuming your state follows along. Many do not.
• Allocating too little to land. Land is not depreciable. An aggressive land allocation inflates every number downstream and invites questions. Use a supportable basis such as the assessor's ratio or an appraisal.
• Treating a repair like an asset, or the reverse. Repairs are deducted outright and improvements are depreciated. Bonus only matters for the second group.

Bottom line

If you acquire a rental in 2026, the short-life components qualify for 100% bonus depreciation, and that treatment is now permanent. The work is in the details: confirm your acquisition date, get a cost segregation estimate, check whether the passive loss rules let you use the deduction, and plan for recapture before you sell. Start with the investor tax tools, then read our depreciation and cost segregation strategy guide to see how the pieces fit together.

This article is general information, not tax or legal advice. Confirm your situation with a CPA.